A big question for large Texas traditional civil law firms used to be whether they wanted to represent clients on a contingency fee basis. Now the question is: How many of those cases do they want to sign up?

“When I became managing partner, I began looking at this very issue,” said Emily Parker, who took the reins at Dallas’ Thompson & Knight in February 2012.

While contingency fee contracts long have been the province of solos and plaintiff law firms, defense-oriented Thompson & Knight has signed up clients on a contingency fee basis for decades, she noted.

“Our contingent fee inventory is slightly less than average. I think it’s less than 5 percent of our inventory, meaning our work in process,” Parker said, adding that she is looking into whether that relatively low percentage is happenstance or careful strategy on the part of her firm.

“I can say with some confidence that I don’t think we’re going to contract the percentage. The real question is whether to expand our investment and, if so, getting a complete buy-in as a strategy and establishing a process for doing that,” Parker said.

The benefit of large commercial firms going all in with contingency fee cases is huge. For example, Dallas’ Gardere Wynne Sewell saw a 10.5 percent jump in its gross revenue in 2009—a time when nearly every Texas law firm was struggling from the consequences of a financial downturn in the United States. The reason for the revenue boost that year was that two large contingency fee cases the firm had worked on for years finally settled, said Steve Good, Gardere’s CEO. [ See "BigTex Combined Gross Revenue Drops in '09," Texas Lawyer, April 26, 2010, page 1. ]

“People get excited when you have a couple of big wins and want to do more of them,” Good said.

But there’s a downside when a firm that normally sustains itself on billable hours takes on too many contingency fee cases, he said. “You don’t want to get so far into it that, if you don’t get some that [payoff], you have a problem meeting payroll,” Good said.

Contingency fee cases have been a serious part of Gardere’s budget planning and investment strategy for the past five years, Good said.

“We began tracking the amount on an annual basis,” he said. “Now we’re saying we’re wanting to invest in the best contingent fee cases we can.”

To vet those cases, they first pass through a committee of litigators and transactional attorneys. The committee might bring in another attorney who specializes in the practice area of a proposed contingency fee case to “poke holes” in the litigation’s viability, Good said.

Striking Balance

George Hansen, managing director in the Houston office of The Claro Group, consults with law firms about financial risks. He said striking a balance between hourly fee cases and contingency fee work continues to be a big issue at Texas law firms.

“From our perspective as financial guys, the challenges at Big Law are: Can you effectively estimate what your investment is going to be versus the outcome of the investment and what the return is going to be? And, can you balance that out in a portfolio, when you’re seeing returns on a regular basis where everyone believes that it’s worthwhile to be doing it?” Hansen said.

“I think the added pressure happens if you’re dealing with a law firm that’s got some credit out,” meaning many of the firms’ pending cases are in contingency fee litigation, Hanson said. “The issue there is: If you have too much investment out at one time, it puts pressure on the model. And if important partners start to leave … then it’s a downward spiral.”

However, the firms who do well financially have a large percentage of their practice devoted to contingency fee work, Hansen said.

One example, he said, is Houston’s Susman Godfrey, which was one of the first Texas commercial law firms to handle contingency fee cases when it opened its doors in 1976.

“No one else was doing it,” founding partner Steve Susman said of his firm’s launch nearly four decades ago. “Turns out a lot of small businesses can’t pay lawyers by the hour, and smart businesses know you get a better lawyer with some skin in the game. I tell people, ‘No plaintiff would pay a lawyer on an hourly basis. You want a partner in a case,’” Susman said. “And I think big businesses are beginning to realize this.”

While the firm’s caseload was initially 100 percent contingency fee cases, that amount has changed over the years and is now about 40 percent, with the remainder split between hourly and fixed-fee work, Susman said.

“You are playing the odds. You don’t put all your eggs in one basket. If you’ve got 20 contingent fee cases, 40 percent may be losers. But the process is, you make more on the winners than you lose on the losers. But if you only take one or two cases like big firms do, and you lose them, they don’t take more on,” Susman said.

One of the reasons his firm is doing less contingency fee work is because when “the big firms are competing for good contingent fee cases … there’s less of them there,” Susman said.

A Gamble

At Winstead, the final word on whether the firm accepts contingency fee cases usually comes from shareholder David Brown, who heads the litigation and dispute resolution department. He generally approves of contingency fee contracts when one of his fellow shareholders proposes that arrangement in business and real estate cases—litigation the firm regularly handles.

For example, he recently signed off on a contingency fee case in which a shareholder was asked only to argue a client’s summary judgment motion.

“He said, ‘I know that like the back of my hand.’ And he gambled, and he was right. We got a lump sum amount if we won. And we did win, and it turned out to be a heck of a deal,” Brown said. “And that guy, we told him, ‘Bring us whatever you want.’”

Yet Brown remembers another shareholder who signed up to represent a client in an out-of-state patent case six years ago.

“It had all of the red flags that told us we shouldn’t take it. It was out of state, the client wouldn’t pay expenses,” Brown said. “And the client said, ‘If we’re going to lose, we’re going to lose early.’”

The client did lose on summary judgment—a decision that was reversed on appeal before the claim eventually was poured out at the trial court, costing the firm even more expense, Brown said.

“We won’t make that mistake again,” Brown said, “at least on my watch.”